Treasuries: U.S. bill rates ease as Senate leaders announce deal

Reuters

* Senate leaders announce deal to end government shutdown

* Bi-partisan bill must be passed by Senate and House

* Treasury's $20 bln one-month bill sale orderly

* Light demand for Treasury sale of $22 bln in 1-yr bills

By Ellen Freilich

NEW YORK, Oct 16 (Reuters) - Interest rates on U.S. Treasurybills that mature in the next two weeks fell on Wednesday asU.S. Senate leaders announced a deal to end a governmentshutdown.

The bi-partisan bill must still be passed by the Senate andthe House of Representatives and signed by the president.

As the $16.7 trillion statutory borrowing limit loomed,investors had hesitated to buy Treasury bills due in the latterhalf of October in case of a default.

But the prospect of an imminent, albeit temporary, solutionto the potential crisis alleviated some of those concerns andhelped smooth a path for Treasury sales of short-term debt.

A $20 billion sale of one-month bills proceeded in anorderly fashion, drawing stronger demand than a similar salelast week. Light demand emerged for the Treasury's auction ofone-year bills, but Jefferies & Co. money market economistThomas Simons said the sale was "routine."

Because of their sensitivity to the debt limit, most of themarket's volatility was concentrated among bills.

"Never before in my career have I spent so much time lookingat the bill curve," said Paul Montaquila, fixed incomeinvestment officer with Bank of the West and BNP ParibasSecurities Corp. "Bills were trading like tech stocks."

While bill rates rose in early dealings, they later eased amid expectations a deal would get done, Montaquila said.

"Dealers were avoiding the sector and clearing banks wereunwilling to finance a paper that matures before year end,causing a fairly chaotic environment. But new hopes for a dealreversed those trends and short T-bill rates fell inanticipation of a deal," said Thomas di Galoma, co-head of fixedincome rates at ED&F Man Capital.

The impact of the unresolved debt ceiling issue was feltearly in the repo market as well, where the general collateralrepo rate briefly rose to the highest level since last year.

The prospect of a deal encouraged markets, but analysts alsocalled it a temporary solution that laid the groundwork foranother potential showdown early next year.

Weeks of bitter fighting among Democrats and Republicansover President Barack Obama's signature healthcare reform lawled to a two-week government shutdown, sidelining hundreds ofthousands of federal workers.

The initial fight over the healthcare law turned into abigger battle over the debt ceiling, threatening a default thatwould likely have reverberated around the world.

On Wall Street, the stock market rallied on news of a dealthat would extend U.S. borrowing authority until Feb. 7 and fundgovernment agencies until Jan. 15, ending the partial governmentshutdown that began on October 1.

Uncertainty over Washington's ability to avert a default ledFitch Ratings to warn on Tuesday that it could cut the sovereigncredit rating of the United States from AAA, citing thepolitical brinkmanship over raising the federal debt ceiling.

"We have no real economic numbers to trade off of, andtraders and investors are glued to their TVs, watching andwaiting for some good news," said Kevin Giddis, head of fixedincome capital markets at Raymond James.

The Federal Reserve will release its Beige Book, ananecdotal narrative describing business conditions throughoutthe nation, at 2 p.m. EDT (1800 GMT).

But Montaquila said the market would likely treat the reportas "an afterthought, with everything that has gone on."

Benchmark 10-year Treasury notes ralliedmodestly on news that a deal was nearing.

Down 5/32 in price earlier in the session, they rose to showa gain of 6/32 on the day. Their yields eased to 2.71 percentfrom 2.73 percent late on Tuesday.

Interest rates on T-bills due on Oct. 24 and Oct. 31 rose in early dealings, but then eased on the likelihood that a feared default had been avoided.

The yield on a two-year Treasury note that matures at theend of October and was issued in 2011 last stood at 0.6611, down from 0.7640 percent earlier in the session.

The Federal Reserve Bank of New York bought $1.464 billionin Treasury coupons with maturities ranging from February 2036through August 2043 as part of the Fed's large-scale purchasesaimed at stimulating the economy and lowering unemployment. The

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